This article explains the different types of trusts available in Arizona. You will learn how each one works, who it benefits, and how to select the right structure to protect your family, minimize estate taxes, and ensure your wishes are honored.
What is a Trust?
A trust is a legal arrangement in which one person, the grantor, transfers control of property to another person, the trustee, for the benefit of a third person, the beneficiary. Its primary purpose is to manage and transfer assets during your lifetime and after your passing. Unlike a will, which only becomes active after death, a trust can function immediately, providing a seamless transition of control over your assets and avoiding the public probate process entirely.
Revocable Trusts vs. Irrevocable Trusts
INSERT GRAPHIC COMPARING Revocable vs. Irrevocable Trusts
A revocable trust, often called a revocable living trust, is flexible. As the grantor, you maintain complete control over the assets in the trust. You can change the terms, add or remove property, or even dissolve the trust at any time. This makes it an excellent estate planning tool capable of adapting to life’s challenges and changes. A revocable trust allows you to manage your affairs while you can and allows a successor trustee to step in if you become incapacitated.
Once you create an irrevocable trust, it generally cannot be altered or undone. When you transfer assets into an irrevocable trust, you relinquish control over them. The benefits are significant. Irrevocable trusts are powerful instruments to protect assets, shielding your wealth from potential creditors and lawsuits. They are also critical for strategies designed to minimize estate taxes, helping preserve more of your legacy for your loved ones.
A Closer Look at Common Types of Trusts
The proper trust structure depends entirely on your unique goals, from providing for a disabled child to leaving a charitable legacy. Here are some of the most common types of trusts we use to help Arizona families secure their futures.
Living Trusts
A living trust is created during your lifetime and becomes effective immediately upon your death. Its main benefit is avoiding the probate court process, which saves your family time, money, and stress. The assets held in the trust can be managed and distributed privately by your trustee. These trusts are often revocable for married couples until the first spouse’s death. At that point, the trust may be divided into separate sub-trusts, such as a marital trust and a credit shelter trust, to maximize the federal estate tax exemption for both spouses.
Special Needs Trusts
A special needs trust provides long-term financial support for a loved one with a disability. This structure is carefully designed to supplement their needs without jeopardizing their eligibility for critical government benefits like Medicaid or Supplemental Security Income (SSI). A trustee manages the funds in the trust and can pay for things that government assistance does not cover, such as specialized medical care, education, or recreation, enhancing the beneficiary’s quality of life.
Charitable Trusts
For those who wish to support causes they care about, a charitable trust offers a way to do so while receiving significant tax benefits.
- Charitable Remainder Trust (CRT): You transfer assets to a trust that provides you or other beneficiaries with an income stream for a set period. After that period, the remaining trust assets go to a designated charity. This can include a charitable remainder annuity trust, which pays a fixed amount each year.
- Charitable Lead Trust (CLT): The charitable lead trust makes payments to a charity for a set term, and at the end of the term, the remaining assets go to your designated non-charitable beneficiaries, often with significantly reduced tax liability.
Asset Protection Trusts
An asset protection trust shields your property from future creditors, lawsuits, or judgments. These are typically irrevocable and must be established well before any potential claim. These trusts can be a cornerstone of the estate planning process for professionals in high-liability fields or individuals with substantial wealth.
Irrevocable Life Insurance Trusts (ILIT)
A life insurance policy is often one of a person’s most significant assets. An irrevocable life insurance trust is created to own your life insurance policy. By doing this, the life insurance proceeds are not considered part of your taxable estate upon your death. This single move can prevent your beneficiaries from losing a large portion of the policy’s value to federal estate taxes, ensuring your family members receive the full intended benefit.
Spendthrift Trusts
If you are concerned that a beneficiary may not be able to manage a large inheritance responsibly, a spendthrift trust can offer protection. This trust limits the beneficiary’s ability to access trust assets directly and protects the inheritance from their creditors. A trustee you appoint manages the funds and makes distributions according to the terms you set, ensuring the assets provide long-term support rather than being squandered.
Generation-Skipping Trusts (GST)
A generation-skipping trust is a type of trust that allows you to transfer a significant amount of wealth to your grandchildren or even more distant descendants without it being taxed at your children’s level. By using your generation-skipping tax exemption, you can create a lasting legacy that bypasses a full layer of estate taxes, preserving more wealth for the family down the line.
Qualified Personal Residence Trusts (QPRT)
Your home is often your most valuable asset. A qualified personal residence trust lets you transfer your primary or secondary home into a trust, removing its value from your estate. You retain the right to live in the qualified personal residence for a specified number of years. At the end of that term, the home passes to your beneficiaries at a fraction of its market value for gift tax purposes.
Intentionally Defective Grantor Trusts
An intentionally defective grantor trust is structured so that the grantor pays income tax on the trust’s earnings, even though the assets are outside the grantor’s estate for estate tax purposes. This approach can help reduce the size of the taxable estate and allow trust assets to grow for the benefit of heirs.
Grantor Retained Annuity Trust (GRAT)
A grantor-retained annuity trust allows you to transfer assets to a trust while retaining the right to receive an annuity for a set period. After that period, any remaining assets pass to your beneficiaries, often with significant estate and gift tax savings.
Testamentary Trust
A testamentary trust is created by your will and only takes effect after your death. It can provide ongoing management and protection of assets for minor children, dependents, or other beneficiaries who may not be ready to manage an inheritance independently.
Customizing Your Trust: One Size Does Not Fit All
The real power of the various types of trust comes from customizing them to your specific family dynamics and financial situation.
Consider a blended family. A husband and wife, both on their second marriage, want to ensure the surviving spouse is cared for, but also want their respective children to receive an inheritance. A simple will could easily fail them.
A Qualified Terminable Interest Property (QTIP) trust, a type of marital trust, can solve this. It provides income and support for the surviving spouse for their lifetime. After the surviving spouse’s estate is settled, the remaining funds are distributed to the first spouse’s children to die, exactly as intended. This prevents the assets from being redirected and provides peace of mind for everyone.
Reach Out to Sorrell Estate & Probate Attorneys
While a simple will leaves your estate vulnerable to the public probate process, a well-crafted trust is a crucial tool for estate planning, ensuring your legacy is managed on your terms for the benefit of those you love most.If you are unsure which trust is right for you or need to review an existing plan, our team is here to provide clarity. Request a consultation with our Scottsdale estate planning attorney to build a plan that protects your assets and your peace of mind. Call us today at (480) 667-6940.